Stagflation? Fed sees higher inflation and an economy growing by less than 2% this year

The Federal Reserve has revised its economic outlook, projecting a slower growth rate for the U.S. economy. The rate-setting Federal Open Market Committee now anticipates a growth rate of 1.7%, down from the previous projection of 2.1% in December. In addition, the committee has raised its inflation forecast, expecting core prices to increase at a 2.8% annual pace, up from the previous estimate of 2.5%. This shift suggests concerns about a potential stagflation scenario, where inflation rises while economic growth stagnates.

In a statement, the FOMC acknowledged increased uncertainty surrounding the economic outlook and emphasized its commitment to monitoring risks to both sides of its dual mandate. The ongoing trade tensions initiated by President Donald Trump’s tariffs on key U.S. trading partners are expected to drive up prices of goods and services, impacting consumer spending.

Federal Reserve Chairman Jerome Powell highlighted the impact of tariffs on inflation, noting a recent uptick in prices. Powell expressed concerns about rising uncertainty and downside risks reflected in survey data from households and businesses. Despite these challenges, the Fed still plans to implement two rate cuts for the remainder of 2025, according to the median projection.

The dot plot, which illustrates FOMC members’ rate projections, indicates that 19 members foresee the benchmark fed funds rate reaching 3.9% by the end of the year. This target range corresponds to 3.75% to 4%. The central bank opted to keep its key interest rate steady within the 4.25%-4.5% range.

Although the Fed remains committed to its rate-cutting strategy, some members have adopted a more hawkish stance. Four members now anticipate no changes to interest rates in 2025, signaling a shift from the previous meeting where only one member held this view.

Overall, the Federal Reserve’s latest targets reflect a cautious approach to balancing economic growth and inflation. The committee’s adjustments to its projections underscore the challenges posed by trade tensions and global economic uncertainty. As the Fed continues to navigate these complexities, investors and policymakers will closely monitor how these developments shape the trajectory of the U.S. economy.

This article was written with contributions from CNBC’s Jeff Cox.